Only tax can restore purchasing power

March 27, 2013

The standard measure of the inequality of wealth in a society is Gini Coefficient. According to this measure the U.S. is slightly more unequal than Iran and much more unequal than any country in the European Union.

This is not surprising, since the gap between the CEOs pay and the pay of workers has grown from 39 to 1, to 200 to 1.

Over the last 30 years increases in the wages and salaries of those in the lower 90 percent have increased only 1.5 percent, while those of the top 1 percent have increased by 150 percent. From a great era - the 1950s, 1960s and 1970s - of middle class prosperity we moved to a narrow plutocracy.

How could this happen.

It began in the 1970s with the revolt of the tax payers, first in California then elsewhere, against the high taxes required by the Welfare State.

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In the 1990s corporate America also launched an attack on the regulations the New Deal imposed on business. Soon there were more lobbyists in Washington than legislators - by 1982 2,500.

Then in 1980 Reagan pronounced that government was not the solution but the problem and promptly lowered taxes, principally on the wealthy. The lowering of taxes was designed to increase government revenue, but they did not. The only persons who gained were the wealthy whose taxes were lowered.

Business and government showed a new aggressiveness toward labor (including right to work laws) with the result that where there were 20.1 million union members in 1990 there were only 11.9 in 2010. But prosperity did not ensue, only lower wages and weakened retirement programs.

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Both Reagan and Bush argued that deregulation and lower taxes would lead to prosperity. They did not. It brought stagnation and inequality. Beginning in 1980 wages stagnated.

Taxes at the top lowered; social programs at the bottom suffered. Moving wealth from the bottom to the top lowers consumption, as those at the top save from 15 to 25 percent. To restore the purchasing power thus lost would require half a trillion a year. The stimulus bill was only 2 percent of this.

Only a progressive tax - taxing the wealthy more than the poor - can restore that purchasing power. We pay a price for inequality, lower productivity and so fewer jobs.